Here's one rub: We, as a society, will not allow anyone to starve just because they cannot/will not provide for themselves. So, if an individual decides to take all his SS money and convert it to the cooperative pension, then that group of pension-fund managers puts all the money into "Styrofoam Lawn Ornament Company, Ltd" and loses everything, who is left holding the bag?
What prevents the managers of existing pension systems from doing the same thing? Aren't there accounting standards, etc etc, that put this sort of mis/malfeasance out of the picture? The same would apply equally (if not moreso) to cooperative pension plans. I'm not suggesting just anyone should be able to start a fund and call it a cooperative pension and have people start diverting their SS tax into it. That would be a gold-edged invitation to scammers! What I have in mind is creating some way that people can buy into the equivalent of the professionally managed (not self-directed) DBPs that were once commonly available through one's employer, but have now mostly gone the way of the dinosaur. I'm eligible for a defined benefit pension through my job with City government, and there are minimum funding requirements, audits, and other safeguards to make sure that City retireees actually get their pensions, and as far as I know, they always have. Cooperative pension plans, as I envision them, would be subject to the same kind of regulations, but be available through connections other than one's employer.
However, to answer your specific question, the (required) pension insurance would "hold the bag". Now, from what I hear the PBGC that covers existing pension funds doesn't charge nearly enough in premiums to actually
guarantee the pensions it covers, and if the pension fund you are depending on goes bust due to bankruptcy of the sponsoring company or whatever, you will probably get a much lower benefit than you were promised. In order for cooperative pension funds to pay the higher premiums necessary to provide adequate insurance, I suppose they'd have to pay a lower benefit for the same salary + years of service than SS would. Some people would think that's a bad deal, and stay in the SS system. Maybe there wouldn't be a stampede out of SS after all, once people saw what the actual benefit offered by a pension coop would be.
You and me--we'll be providing welfare, food stamps, etc for the rest of his life. So, if this idea you've proposed is implemented, I'd strongly urge that there be a floor set--that no one can be allowed to put at risk the funds needed to keep their heads above water (because, from a practical standpoint, they aren't gambling with their money below that level, they are gambling with mine).
As I wrote, it would be the CPPI (Cooperative Pension Plan Insurance) who would be paying for all that. Even if cooperative pension plans never come to be, we're all still required (through SS taxation) to put the funds needed to keep our heads above water at risk--at risk that the SS sytem will not pay the benefits promised, will delay eligibility, will pay benefits with the right hand and tax them away with the left, or that the government will just print the money to pay everyone "in full" and the resulting inflation will reduce the purchasing power of the benefit as much as a cut in the dollar amount would have done without the inflation.
What I'm proposing is the addition of a fourth leg to the "three legged stool" analogy. Right now a person has at least two, possibly three retirement savings possibilities: Social Security, personal, self-directed savings (IRAs, 401k's etc), and for some, employer pensions. I propose adding the option of allowing individuals to redirect part of their SS tax into a professionally-managed, defined-benefit pension system. The problem with a three-legged stool is that if it loses a leg, it can't stand. If one of the legs of a four-legged stool is lost, there are still three, and at least a chance that it won't fall over. It may not be quite as comfortable as it would have been with four, but at least it's still functional. How much money goes to each leg would be up to the individual, after the SS tax amount. Anyone who wanted to stay 100% SS could do so, and anyone who wanted to go 100% coop could do so (asssuming that there is a solution to the difficulty pointed out by independent). Anyone who wanted to do a self-managed 401k or IRA instead of a coop pension could do that--and given the inadequacy of the average American's investment management skills, my guess is that it would be the people who opt for self-managed plans who would end up on the dole.
The result would be pretty much what we have now: A small govt-guaranteed SS annuity to assure folks need no/very little other public assistance, and the individual market-based system (IRAs, 401(k)s,) that people can use to lift themselves above this level. If they want more income security (with a near gaurantee of lower overal return), they can buy a private annuity with this private money.
IMO, sending the individual retiree to purchase an annuity is not equivalent to allowing groups of retirees to form a pension fund and have it professionally managed. It replaces a pension fund controller who has a professional duty to maintain the fund in a financially sound condition so that the promised benefits can be paid with a salesperson whose professional duty, if you can call it that, is to sell an annuity no matter what. I can guess who will get the short end of the stick on that deal.
